McDonald’s (MCD) Dividend Stock Analysis 2012

McDonald’s Corporation (MCD), together with its subsidiaries, franchises and operates McDonald’s restaurants primarily in the United States, Europe, the Asia Pacific, the Middle East, and Africa. This dividend aristocrat has paid dividends since 1976 and increased distributions on its common stock for 35 years in a row.

The company’s last dividend increase was in September 2011 when the Board of Directors approved a 14.80% increase to 70 cents/share. The company’s largest competitors include Yum Brands (YUM), Starbucks (SBUX) and Burger King (BKW).

Over the past decade this dividend growth stock has delivered an annualized total return of 16.70% to its shareholders.

The company has managed to an impressive increase in annual EPS growth since 2002. Earnings per share have risen by 23.80% per year. Analysts expect McDonald’s to earn $5.44 per share in 2012 and $6.02 per share in 2013. In comparison McDonald’s earned $5.27/share in 2011.

The company’s international operations have fueled the strong growth in McDonald’s earnings over the past twenty years. Despite the fact that a little over half of the company’s profits are derived internationally, this segment could continue to deliver solid performance in the future. Another factor fueling the company’s growth and maintenance of its edge against competitors and other threats has been its ability to innovate in its menu and reinvent itself in order to win. Some examples of that include the addition of salads to its menu a few years ago, as well as the introductions of premium drinks for customers. The company has also been able to focus on streamlining operations and focusing on same-store sales, rather than mindlessly expanding at all costs. However, it still plans on expanding store count, while also reimaging existing locations, in order to improve the customer experience.

McDonald's growth targets include:

- Average annual sales growth of 3% to 5%
- Average annual operating income growth of 6% to 7%, and
- Return on incremental invested capital in the high teens

The company also has a strong brand name, which has also allowed it to pass on price hikes onto customers, who nevertheless are still perceiving it’s menu in the “value” category. As a result, inflationary pressures should not affect profitability by a wide margin.

The return on equity has expanded from 10% in 2002 to 30% in 2012. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 27.40% per year over the past decade, which is much higher than to the growth in EPS.

A 27% growth in distributions translates into the dividend payment doubling every two and a half years. If we look at historical data, going as far back as 1976 we see that McDonald’s has actually managed to double its dividend every three and a half years on average.

The dividend payout ratio has increased from 31% in 2002 to 48% in 2011. The expansion in the payout ratio has enabled dividend growth to be faster than EPS growth over the past decade. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently, McDonald’s is attractively valued at 16.80 times earnings, yields 3.10% and has an adequately covered dividend.

Full Disclosure: Long MCD and YUM

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The Live off Dividends Retirement Plan

I often speak with investors who want to retire at some point in their lives. Unfortunately, we live in a world, where companies offering traditional pensions are shrinking in number. In addition, there is little assurance about the ability of the Social Security Fund to fund the same level of benefits for Gen X and Gen Y participants as it will for Baby Boomers. Add in uncertainties about potential for hyperinflation due to FED's printing presses, low interest rates on fixed income and a decade of zero stock market returns, and it is no wonder many people are afraid about their retirement prospects.

These investors are looking for a vehicle, that would give them the chance to overcome several risks they are facing. The risks include:

1) Inflation

2) Volatility

3) Taxes

4) Outliving one's money

5) Costs

In other words, investors are typically looking for an asset class, that would provide them with enough income to support them for the rest of their lives. This stream of income should be able to maintain its purchasing power, and should not be volatile. In addition, this income source should lead to as little in taxes as possible. Furthermore, this income stream should last for life and even be available to pass on to future generations. This income stream should also be relatively cheap to maintain and easy to convert into cash.

Dividend growth stocks represent share ownership in companies which can afford to regularly raise distributions. This is due to the fact that they are typically characterized by having wide-moat businesses, strong competitive advantages and strong brand names. This allows these companies to maintain pricing power, that allows them to pass on cost increases to consumers who are willing to pay a premium price for these products or services. As a result, this pricing power converts in companies' abilities to generate high earnings over time, which increases the odds of maintaining purchasing power of the dividend income stream.

The fact is that most prominent dividend growth stocks sell goods or services that are used by consumers on an everyday basis. Since most of these goods and services are essentials, the demand for them does not fall off during an economic downturn. They might postpone purchasing a new car or a new computer by a few years. Even during a recession, people still eat, shower, drive and buy groceries. This ability helps dividend growth companies in earning a sufficient amount even during the most tumultuous times in order to pay a consistent and rising dividend to shareholders. The predictability of the amount and timing of dividend payments, makes these income stocks ideal for retired investors. The fact that dividend investors use distributions from their portfolios to fund their expenses, makes it real easy to live off their nest eggs. Dividend investors do not need to worry about bear markets and selling off shares at depressed prices, because they simply live off the dividends that their income portfolios generate. In addition, these investors know exactly how much income they can expect to receive from their portfolio for the week, month or year. As long as these dividends are at least maintained, investors should be able to fairly easily estimate their dividend incomes for any given timeframe.

In addition to that, dividend income is one of the most efficient taxable form of income available to investors. Currently, the top tax rate on dividends is 15%. The top tax rate on dividends is equal to the highest tax rate on capital gains. The main difference is that dividend income is fairly predictable and less volatile than capital gains. The interest on Corporate and Federal Bonds is taxed as ordinary income. Even if the tax on dividends is increased, it is unlikely that investors who make less than $100,000 in annual dividend incomes will be affected by too much.

The types of core dividend stocks for any income portfolios include companies such as:

Philip Morris International Inc.(PM), through its subsidiaries, manufactures and sells cigarettes and other tobacco products. This Consumer Goods company has managed to boost distributions every year since the spin-off from Altria in 2008. Emerging Markets growth, acquisitions and strong pricing power will be some of the key factors driving future profitability and dividend growth. The stock trades at a P/E of 18.60 and yields 3.40%. (analysis)

PepsiCo, Inc. (PEP) engages in the manufacture and sale of snacks, carbonated and non-carbonated beverages, dairy products, and other foods worldwide. I find Consumer Goods company to be a better value than arch rival Coca-Cola at the moment, while I find both to have similar growth characteristics going forward. Coca-Cola (KO) is trading at 20.90 times earnings and yields 2.60%, while PepsiCo yields 3% and trades at 19.30 times earnings. PepsiCo has managed to boost distributions for 40 years in a row, and has a ten year dividend growth of 13.30%/year. (analysis)

Abbott Laboratories (ABT) engages in the discovery, development, manufacture, and sale of health care products worldwide. This Healthcare company is cheaper than what popular sites like Yahoo! show right now, since the earnings figures are including one-time items. I find it attractively valued at 16.50 times earnings and yielding 3.10%. Abbott has raised dividends for 40 years in a row,and has a ten year dividend growth rate of 8.70%/year. Abbott announced its intent to split in two companies in October 2011. (analysis)

Chevron Corporation (CVX), through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. This integrated energy company has one of the best reserve replacement ratios in the industry. It is also attractively valued at 8.40 times earnings and yields 3.20%. It has raised dividends at 8.80%/year over the past decade. The company plans to spend $37 billion/year in capital spending over the next five years. The company is targeting over 22 projects, that will deliver 1 million BOE/day by 2016. The major projects that are expected to be brought online include Kashagan Phase 1 project in Kazakhstan, Kearl Oil Sands Project in Canada as well as a few in Africa. Its recent deal with Rosneft to explore in the Arctic and Black seas could generate long-term dividends for the corporation, which has tried to do business in Russia for years. (analysis)

Automatic Data Processing, Inc. (ADP) provides business outsourcing solutions. The company operates in three segments: Employer Services, Professional Employer Organization (PEO) Services, and Dealer Services. This technology company is expecting higher revenues as a result of acquisitions, improving client retention rates, and increased North American auto sales, which would boost its Dealer Services segment. The hidden growth kick behind ADP is the relatively untapped market for payroll outsourcing services for small and medium sized businesses. The company has boosted dividends for 37 years in a row and has a ten year dividend growth rate of 13.40%/year. It is attractively valued at 20 times earnings and yields 3.20%. (analysis)

Kinder Morgan Energy Partners, L.P. (KMP) operates as a pipeline transportation and energy storage company in North America. The partnership expects its acquisition of El Paso to generate significant synergies and cost savings starting from year one. It also plans on increasing distributions in 2012 to $4.98/unit. Kinder Morgan expects future distribution growth to average 5%-6% over the next several years, as it expands its network of fee generating assets. This dividend achiever has boosted distributions for 16 years in a row and has a ten year distribution growth rate of %/year. Yield: 6.10% (analysis)

Full Disclosure: Long All companies mentioned above

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Five Stocks Delivering the Gift that Keeps on Giving

Like a fisherman, each week I cast my screening criteria net over the list of companies which have announced increases in distributions to shareholders. I then list out all companies which have managed to boost distributions for over five years in a row, and do a quick follow up in order to determine whether I want to dig a little further if a particular security piques my interest. This list also provides me with a measure of pockets of strength in certain sectors or individual stocks. After all, even if the overall economy is not doing fantastically well, there are always stocks or sectors which can grow for years before reaching a market saturation point. This would translate into higher earnings, dividends and stock prices over time, a trifecta that generally benefits investor’s returns.

Included below are five consistent dividend increasers, along with my commentary about each one of them:

Badger Meter Inc. (BMI) manufacturers and marketers flow measurement and control products to water and gas utilities, municipalities, and industrial customers worldwide. This dividend achiever raised quarterly distributions by 6.25% to 17 cents/share. This marked the 20 consecutive annual dividend increase for the company. Yield: 2%

Nordson Corporation (NDSN) engineers, manufactures, and markets products and systems for precision dispensing, testing and inspection, fluid management, surface treatment, and curing. This dividend champion raised quarterly distributions by 20% to 15 cents/share. This marked the 49th consecutive annual dividend increase for the company. Yield: 1.10%

While both Badger Meter and Nordson have been able to raise distributions for over 10 years in a row, they are overvalued at the moment and yield less than my 2.50% entry criteria. If they get closer to that yield either by falling in price or increasing distributions, I would add the stocks to my list for further research.

Connecticut Water Service, Inc. (CTWS), through its subsidiaries, operates as a regulated water company in Connecticut. It operates through three segments: Water Activities, Real Estate Transactions, and Services and Rentals. This dividend champion raised quarterly distributions by 2.10% to 24.25 cents/share. This marked the 43th consecutive annual dividend increase for the company. Yield: 3.10%

I like the fact that this utility has a long streak of distribution raises to its loyal investors. However, the dividend increase of 2.10% and the anemic ten year dividend growth rate of 1.60%/year are enough to make me want to look elsewhere. Utilities have historically been decent producers of current high income. The plight to chase dividends by yield hungry investors has led to poor risk reward opportunities for income investors in general.

Bob Evans Farms, Inc. (BOBE) owns and operates full-service restaurants under the Bob Evans and Mimi’s Café brand names in the United States. This dividend paying company raised quarterly distributions by 10% to 27.50 cents/share. This marked the 7th consecutive annual dividend increase for the company. Yield: 2.80%

While Bob Evans Farms looks attractively valued at the moment, it has not yet reached ten years of consecutive dividend increases. In addition, earnings have only increased from $2.13 in 2003 to $2.46 in 2012, which does not promise much in future distributions growth.

ITC Holdings Corp. (ITC), together with its subsidiaries, engages in the transmission of electricity in the United States. This dividend paying company raised quarterly distributions by 7.10% to 37.75 cents/share. This marked the 8th consecutive annual dividend increase for the company. Yield: 2.10%

Unfortunately, ITC is overvalued at the moment, as it trades at 21.80 times earnings and yields only 2.10%. I would add the stock to my list for future research and would consider initiating a position on dips below $60.

Full Disclosure: None

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Exxon Mobil (XOM) Dividend Stock Analysis 2012

Exxon Mobil Corporation (XOM) engages in the exploration and production of crude oil and natural gas, and manufacture of petroleum products, as well as transportation and sale of crude oil, natural gas, and petroleum products. This dividend aristocrat has paid dividends since 1911 and increased distributions on its common stock for 30 years in a row.

The company’s last dividend increase was in June 2012 when the Board of Directors approved a 21.30% increase to 57 cents/share. The company’s largest competitors include Chevron (CVX), British Petroleum (BP) and Royal Dutch (RDS.B).

Over the past decade this dividend growth stock has delivered an annualized total return of 11.50% to its shareholders.

The company has managed to an impressive increase in annual EPS growth since 2002. Earnings per share have risen by 20.10% per year. Analysts expect Exxon Mobil to earn $7.83 per share in 2012 and $8.44 per share in 2013. In comparison Exxon Mobil earned $8.42/share in 2011.

The company plans to spend $37 billion/year in capital spending over the next five years. The company is targeting over 22 projects, that will deliver 1 million BOE/day by 2016. The major projects that are expected to be brought online include Kashagan Phase 1 project in Kazakhstan, Kearl Oil Sands Project in Canada as well as a few in Africa. Its recent deal with Rosneft to explore in the Arctic and Black seas could generate long-term dividends for the corporation, which has tried to do business in Russia for years.

The company has also tried to increase its exposure to Natural Gas, through its E&P activities as well as acquisition of XTO Energy in 2010. Unfortunately, natural gas prices have remained in the doldrums, which would affect profitability negatively. In addition, there are few factors that could lead to increase in natural gas prices in the America’s. One bright spot however includes the fact that foreign natural gas prices are more robust than the US ones however.

Over the past fifteen years, the company has consistently added to its refining capacity. Refining however is a cyclical business, that is mostly been seen as a cash cow for major integrated producers over the past few years.

Exxon is one of the most consistent repurchasers of stock I have seen, dedicating $5 billion/quarter for this activity. As a result, the number of shares outstanding has decreased from 6.954 billion in 1999 to 4.716 billion in 2012. However, this has resulted in a stingy dividend payout policy, and below average yields compared to its peers. The company has been able to purchase a large quantity of shares without looking at price, and I have argued that in essence shareholders would have been better off just receiving special distributions.

The return on equity has closely followed the rise and fall in oil and natural gas prices. It rose between 2002 and 2007, and then dipped in 2009, before rebounding strongly. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 7.40% per year over the past decade, which is much lower than to the growth in EPS.

A 7% growth in distributions translates into the dividend payment doubling every ten years. If we look at historical data, going as far back as 1974 we see that Exxon Mobil has actually managed to double its dividend every nine and a half years on average.

The dividend payout ratio has remained below 50% for the majority of the past decade. Exxon Mobil has a stingy dividend payout, and instead focuses its excess cash flows towards stock buybacks. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently, Exxon Mobil is attractively valued at 9.20 times earnings, yields 2.60% and has an adequately covered dividend. Unfortunately, I find other companies such as Chevron (CVX) better values at the moment, which is why I do not plan on adding to my Exxon position significantly over the next year.

Full Disclosure: Long CVX, XOM and RDS.B

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Six Dividend Stocks Raising Distributions

Over the past week six income stocks announced plans to reward shareholders with increased dividends. I highlighted the ones that have managed to boost distributions for at least five consecutive years. I tried to further screen each company, using my entry criteria. In addition, a brief commentary behind each company is included.

Illinois Tool Works Inc. (ITW) manufactures various industrial products and equipment worldwide. The company raised its quarterly distributions by 5.60% to 38 cents/share. This marked the 49th consecutive annual dividend increase for this dividend champion. Yield: 2.70% (analysis)

The company looks attractively valued at the moment, and seems to have enough room to grow distributions. I would consider adding to my position, subject to availability of funds.

Questar Corporation (STR) operates as an integrated natural gas company in the United States. The company raised its quarterly distributions by 4.60% to 17 cents/share. This marked the 33rd consecutive annual dividend increase for this dividend aristocrat. Yield: 3.30%

Questar sounds like an attractively valued company at the moment, which I plan on adding to my list for further research. It spun-off its Exploration and Production company in 2010, which makes research slightly more challenging, since it would take some adjusting of historical financials to determine true trends in the business from before the spin-off.

National Health Investors, Inc. (NHI), a real estate investment trust (REIT), invests in health care properties, primarily in the long-term care industry in the United States. The company raised its quarterly distributions to 67 cents/share. This marked the 10th consecutive annual dividend increase for this dividend achiever. Yield: 5.10%

I like the fact that this REIT has managed to boost distributions consistently over the past decade, while also distributing excess cash to shareholders in the form of special dividends. NHI had a FFO payout ratio of 84% for first six months of 2012, which is sustainable for a REIT. However, I would like to add it to my list for further research.

Monsanto Company (MON), together with its subsidiaries, provides agricultural products for farmers in the United States and internationally. It operates in two segments, Seeds and Genomics, and Agricultural Productivity. The company raised its quarterly distributions by 25% to 37.50 cents/share. This marked the 12th consecutive annual dividend increase for this dividend achiever. Yield: 1.70%

I like the company’s strong earnings and dividend growth over the past decade. EPS rose from 13 cent/share to $4/share, while the ten year dividend growth rate is 17.60%/year. Unfortunately, the company is overvalued at 22 times earnings and yields only 1.70%.I would consider it on dips below $60.

Broadridge Financial Solutions, Inc. (BR), together with its subsidiaries, provides technology solutions to the financial services industry in the United States, Canada, and the United Kingdom. It operates in two segments, Investor Communication Solutions and Securities Processing Solutions. The company raised its quarterly distributions by 12.50% to 18 cents/share. This marked the sixth consecutive annual dividend increase for the company. Yield: 3.30%

The company has delivered impressive dividend growth since it was spun-off from Automatic Data Products (ADP) in 2007. Unfortunately, it has been unable to grow distributions over the past five years. Without earnings growth, companies can only afford to raise dividends for a limited period of time, before they hit a logical ceiling.

Leggett & Platt, Incorporated (LEG) designs and produces various engineered components and products worldwide. The company raised its quarterly distributions by 3.60% to 29 cents/share. This marked the 41st consecutive annual dividend increase for this dividend champion. Yield: 5%

Despite the high yield, Leggett & Platt has a dividend payout ratio of 100% and almost no earnings growth over the past decade. As a result, I would rate the stock a hold at best.

Full Disclosure: Long ITW and ADP

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